Hughes for Sale: GM Or Ford may be the buyer

More than anything else, the late Howard Hughes loved airplanes. In 1932 he founded Hughes Aircraft, which manufactured the Winged Bullet that Hughes piloted to a U.S. transcontinental speed record of 7 hr. 28 min. at an average speed of 327 m.p.h. The company also built the famed “Spruce Goose,” the eight-engine plywood plane that flew just once, with Hughes at the controls. Now a major defense contractor based in El Segundo, Calif., Hughes Aircraft is an important producer of satellites and missiles. It has high-security factories, where some of America’s brightest engineers work on advanced military technology. Among its 1,500 projects: hardware for Ronald Reagan’s Star Wars program.

Last week the company, which had 1984 sales of $4.9 billion, was put on the auction block by its sole owner, the Howard Hughes Medical Institute of Bethesda, Md. Expected selling price: around $4 billion, but possibly as much as $6 billion. Among possible buyers: General Motors, Ford and Boeing.

The sale of Hughes has been surrounded by almost as much mystery as the life of its founder, the eccentric multibillionaire who died in 1976 after hiding from public view for almost 20 years. Sealed bids had to be delivered by last Wednesday to Morgan Stanley, the New York investment firm that is handling the sale. They will be studied by the Medical Institute’s board of directors and Morgan Stanley, with the winner announced possibly in early June.

Most firms interested in Hughes have refused to identify themselves. Ford Chairman Donald Petersen declines to say if his company was among the bidders, and GM Chairman Roger Smith has been just as reticent. Two companies, Allied and Signal, had been expected to bid but changed their minds and decided to merge instead.

The sale of the aircraft company was forced on the Hughes Medical Institute by Internal Revenue Service rules governing the tax-exempt status of organizations. In 1953 Howard Hughes created the Medical Institute and gave it Hughes Aircraft as its only asset. This made the company accountable only to the institute’s trustees, of which Hughes was the only one. That made Hughes Aircraft far freer than publicly owned companies to limit dividends and invest its profits as it saw fit in research and development.

IRS rules require all medical research institutes to spend at least 3.5% of assets annually to maintain their tax exemption. New institute trustees appointed by a Delaware court last year began facing up to the tax reality. Hughes Aircraft would have to give the institute as much as $100 million this year alone. Rather than cope with the cash drain, Hughes Aircraft and the institute decided to part company.

For the Medical Institute, the money from the sale of Hughes means being the richest charitable institution in America, outstripping the Ford Foundation’s resources of $3.5 billion. For Hughes, the sale means a whole new way of doing business. Says Donald White, 53, Hughes’ president: “We haven’t had an involved owner. So we managed the company with a unique sort of team spirit.”

Wall Street analysts say it would be a good mix for Hughes to link up with < an auto company. Detroit’s carmakers, flush with record profits, have deep pockets filled with cash, $8 billion at GM and about $6 billion at Ford. They are looking for more defense business, as well as high-tech acquisitions. GM last year bought Dallas’ Electronic Data Systems, a computer-services company, for $2.55 billion.

Hughes could also benefit from such a deal, particularly by using Detroit’s expertise in high-volume production. One of the few blots on the company’s record came from sloppy workmanship last year on its Phoenix, Maverick and TOW missiles. There are other benefits too. Says Hughes Chairman Allen Puckett: “If one of the auto companies emerges as the buyer, I think it would want us to continue developing high technology.”

One bid put forward last week is certain not to emerge as winner. Karl Kaufmann and Robin Burke, both 21 and students at Harvey Mudd College in Claremont, Calif., submitted their check for $6 billion drawn on the bank account of the school’s West Dorm. Profit from Hughes, said the students, would “fund various activities such as our annual Tequila Night party.” One problem was that their checking account contained just $300.